Supreme Court Shields Investment Funds From Shareholder Lawsuits

The US Supreme Court shielded funds from some investor lawsuits, ruling that an 86-year-old federal statute doesn’t authorize shareholders to sue over bylaws and management decisions.

Voting 6-3, the justices on Thursday blocked activist investors from suing 11 closed-end funds, including some affiliated with FS Credit Opportunities Corp. and BlackRock Inc. The suing investors, led by hedge fund manager Boaz Weinstein’s Saba Capital Master Fund, were seeking more control over the funds.

The high court said the 1940 Investment Company Act doesn’t authorize private lawsuits for most violations, leaving enforcement to the US Securities and Exchange Commission. The ruling reverses a federal appeals court decision that had said the law contained a so-called private right of action letting investors sue in federal court to rescind contracts made by a fund.

“Nothing in the text or structure of the ICA indicates that Congress authorized private parties to enforce virtually every provision in the statute,” Justice Amy Coney Barrett said for the court. The three liberal justices dissented.

Saba was trying to use the ICA to challenge the funds’ reliance on Maryland’s “control-share” law, which lets controlling investors block others from acquiring more than a 10% voting share. Saba said the Maryland law lets underperforming funds escape accountability, while FS and BlackRock said it helps funds take a long-term view, protecting them from arbitragers seeking short-term profits.

The ICA is designed to protect investors in a variety of ways, including through registration and disclosure requirements. The provision Saba sought to invoke says that each share of a fund generally shall have “equal voting rights with every other outstanding voting stock.”